The Canadian dollar plunged in overnight trading. It was not alone. U.S. President Donald Trump upped the ante in the trade dispute between the United States and China. He threatened to levy 10% tariffs on another $200 billion worth of Chinese imports. He then said he would add another $200 billion worth of goods to the list if China retaliates. China was irritated. A ministry of Commerce spokesperson said, "If the U.S. loses its senses and publishes such a list, China will have to take comprehensive quantitative and qualitative measures." He called the move "blackmail."
Financial markets called the move "Trade War." Global equity indices plummeted. The Shanghai Composite Index (CSI 300) led the markets lower, dropping 3.53%. European bourses are all down, and U.S. equity futures suggest Wall Street will open with losses.
Negative technicals exacerbated the Canadian dollar losses. The USD/CAD break above the $1.3205 level overnight broke a major resistance level from June 2017. That move opened the door to additional gains to $1.3340.
Toronto traders drove the loonie lower in early trading this morning. Traders are also concerned about the North American Free Trade Agreement.Trump has put tariffs on imports of Canadian steel, aluminum, and softwood lumber and is threatening to do the same for agricultural and dairy imports, all while trade talks are still going on.
Last week, the Federal Open Market Committee,(FOMC) raised U.S. interest rates by 0.25%, making the target for the Federal Funds range 1.75% to 2.0%. That increase was widely expected. The committee also raised their projected interest rate increases in 2018 from three to four. That move caught some market participants off-guard, and they started buying U.S. dollars. The Canadian dollar was driven lower because of the perception that the domestic risks from tariffs would force the Bank of Canada to leave interest rates at current levels.
However, the bearish outlook for the Canadian dollar could change on Friday. Canada retail sales and inflation reports are due. Retail sales have surprised to the upside in the first quarter of 2018. Economists and analysts expect a soft report due to weak auto sales. Nasty weather may have also played a role. If Retail Sales surprises to the upside, the loonie would rally.
The Canadian dollar may also get a lift from a higher than expected inflation report. The forecast is for a 0.4% rise, m/m. A higher number may force the Bank of Canada’s hand and reopen the discussion about a July interest hike.
There aren’t any Canadian data today, and trade war fears will overshadow the U.S. data (housing starts, building permits).
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
